Global Electronics Essay Example

Indiana; and Reading, Pennsylvania, with approximately 2,300 employees. Additionally, they have an assembly and test facility in Koala Lump, Malaysia with 4,000 employees.

The manufacturing process consists of two main phases. The fabrication phase involves procedures such as photomicrography, etch, diffusion, and circuit probe. On the other hand, the assembly and test phase involve procedures including wafer saw, die attach, wire bond, mold, solder dip, and final inspection.The manufacturing process had become more technologically diverse and intense each year, resulting in direct labor representing less than 10 percent of total manufacturing cost by 1999. The company manufactures various electronic goods, including power and logic commodity products as well as analog and digital specialty products. The company's customer base is highly diverse within each product line. In 1999, Gee experienced a decline in profitability, with operating losses reaching $100 million on sales of about $650 million. This raised concerns about the accuracy of the company's standard cost system in determining product profitability. The lack of understanding of product profitability, along with a flawed product mix and poor marketing decisions, may have contributed to Gee's financial problems. Furthermore, the company faced internal issues and external threats in an industry characterized by global competition, decreasing product life cycles, product proliferation, and rapid technological advancements. As a result, the top management underwent significant changes in February 2000.As part of the shake-up, GEE appointed Mike Alberta as the new president and Steve Shannon as the new controller in order to strengthen the company's market position and improve its financial performance. GEE's standard cost system allocated manufacturing overhead costs to products based on direct labor dollars. From 1994-1999, the predetermined manufacturing overhead

rate increased significantly from 300 percent to over 600 percent of direct labor. With advancements in technology in the manufacturing process, there were concerns that high-volume or less complex products were being overpriced and low-volume or more complex products were being underpriced. Consequently, GEE struggled to compete with the lower prices offered by competitors in high-volume commodity business, leading to difficulties in managing inventory. On the other hand, GEE consistently gained high-margin opportunities in low-volume specialty business. A product engineer summarized the issue by stating that the labor-based cost system was fairly inaccurate and created misconceptions. For instance, the mature high-volume logic product line was burdened with a significant portion of total factory costs, making the newer lower-volume specialty products appear cheaper. The perception was that GEE was performing well in all areas except for logic, which seemed marginally unprofitable.

Instead of simply pouring money into new products and letting the mature product lines cover their costs deceptively, the product engineers at Gee recognized the limitations of the labor-based standard cost system. They understood that manufacturing low-volume, specialty orders added complexity that was not accurately reflected in the cost system. To address this issue, they created an offline costing system called Product Unit Cost (PUC) in January 1999. The PUC system incorporated time as a driver, along with labor, by considering the time a product spent in different stages of manufacturing such as FAA, probe, assembly, and test. Although this approach reduced distortion, both the PUC system and the direct labor-based standard cost system were tracked separately instead of reconciling the differences between them. This resulted in managers having two sets of cost data to

choose from, creating confusion and leading to more time spent arguing about the correct costs rather than addressing the actual problems at hand. As a result, the PUC system was discontinued by January 2000 due to the irreconcilable cost figures causing confusion.

In response to the PUC system failure, Mike Alberta formed an executive committee to address the product-cost distortion problems in the direct labor-based standard cost system. Given Gee's declining financial performance, he wanted a quick solution. In May 2000, the committee decided to implement an activity-based costing (ABC) system. This system assigns resource costs to activities and uses cost drivers to assign activity costs to products. The implementation was led by Chris Richards, Director of MIS, who had a background in ABC and was able to effectively communicate with senior management. With the help of an academic consultant and an external consulting firm, Chris used his knowledge and interpersonal skills to gain top management's support. Gee's operating performance also played a role in facilitating the change process.

Ann Concerns, the Director of Manufacturing Finance, emphasized the importance of having an "urgency factor" in the BBC implementation. She believed that if the company was only making a 10 percent return on sales, people would not have taken them seriously. However, operating losses of $100 million grabbed people's attention. To oversee the implementation, the executive committee formed a steering committee with Chris Richards as the chairman. Members from various departments and an external consulting firm were also involved in this committee.

In June 2000, a project team consisting of MIS and finance personnel from headquarters was formed by the steering committee. Their task was to

visit each plant, define activities, assign resource costs, select activity drivers and determine their quantities, and calculate BBC rates. Ann Concerns was appointed as the director of this project team. Both the steering committee and the project team received full support from Mike Alberta, Steve Shannon, and the entire executive committee.

The main short-term objective was to improve product cost accuracy and optimize the product mix quickly to address GEES' poor financial performance. The long-term goal was to move towards practicing Activity-Based Management (BAM).

GEE expected that the BBC data from the BBC data-gathering process could aid its product engineers in predicting the cost impact of product design changes. It could also assist its process engineers and operations managers in identifying and prioritizing opportunities for reducing process costs. Before beginning the data-gathering process, the project team had to make two important decisions regarding scale. First, GEE had to choose between a pilot-study approach or a worldwide "blitz" approach. Initially, the team wanted to conduct a pilot study at one of the fabrication facilities, but the product line manager pointed out that only knowing half of a product's cost would be useless. Ann Connors explained that they considered only doing the study at the Reading plant, but one of the product line managers emphasized that this would not serve their goal of improving "front-to-back" product cost since their products moved to Malaysia. As a result, they decided that taking a piecemeal approach would not meet their main objective. Additionally, considering the urgency communicated by Mike Alberta, the team realized that the pilot-study approach was too slow. Therefore, they shifted their focus to calculating a complete "front-to-back" BBC

cost for each product line.

To unify the text andit, we have:

The calculation of BBC costs at the front-end fabrication facilities and their linkage to the BBC costs calculated at the offshore back-ND assembly and test facility in Koala Lump was necessary. Another issue related to scale was systems integration. The external consultants recommended an offline approach where the BBC cost data would be maintained separately from the existing direct labor-based standard cost system and financial reporting system. However, Ann Connors argued for an integrated approach based on lessons learned from the previous PUC experience. Eventually, Chris Richards decided to support Ann's push for an integrated BBC system in order to influence employee behavior. The challenge with an integrated approach is how to affect behavior when the marketing organization relies on incorrect costs. How do you motivate people to focus on the right products if there are accountants with knowledge derived from an offline system that others are unaware of?

The project team decided that using an offline system would lead to data integrity issues and problems with motivating behavior. Therefore, the executive committee approved the use of an integrated approach. This approach would connect with Gee's general ledger, standard cost, and financial reporting systems, as well as its production planning, factory control, bill of material, and materials management systems.

Gee developed its own customized software called ACCURATE to capture data inputs, interface with the standard cost subsystem, and calculate product costs. In July 2000, the project team received a week of training from an outside consulting firm before beginning plant visits. After training, the project team created a timetable for implementing BBC that allowed for

just nine months to complete a worldwide roll-out integrated into Gee's financial and operational reporting systems.

Despite the ambitious schedule, with support from Mike Alberta and Steve Shannon, the project team believed it was achievable. Exhibit 1 summarizes the events that led to the BBC implementation and the sequence of plant visits conducted within the nine-month timeframe. The BBC implementation was successfully finished within the planned nine months.Based on 88 interview sessions, a total of 674 activities and 254 activity drivers were identified across all five plants and entered into the standard cost subsystem for financial reporting. The project team focused on including activities in the cost model that could significantly impact product pricing and mix decisions. In the next phase of implementation, detailed activity analyses of high-cost activities would be conducted to target continuous improvement. Chris Richards emphasized the importance of narrowing focus due to limited resources. The initial step is to identify high-cost activities and optimal product mix at a macro level. Then, analysis is conducted at a micro level to understand cost drivers and determine appropriate performance measures. It is important to prioritize activities for analysis based on cost distortions.That is typically why people are drawn to the BBC. The processes of building models and gathering data at each plant are managed by members of the centralized/functional project team. Plant-level employees are responsible for providing information on activity definition, resource drivers, and activity rivers, while the project team supervises the implementation across plants. Ann Connors identified both strengths and weaknesses in relying on a centralized and functional project team. In terms of centralization, having a core project team ensures consistency across plants. However,

there was a mistake made in sending a new core team to Malaysia that was not involved in the front end of the process, causing things to get out of control. In terms of functional orientation, the project team lost credibility with employees on the manufacturing floor because they focused more on accounting rather than operational decision making. The training provided by the project team for plant-level employees was minimal. Instead of explaining and providing training, the focus at the plant level was on getting people to participate in the BBC process regardless of their personal beliefs. The decision to implement BBC had been made at headquarters.
The decision to implement the BBC system in the plants was made without prior consultation with plant-level personnel. However, these personnel were subsequently expected to accommodate the demands of the system. However, they felt that the training provided by the team was inadequate. During the training, they simply showed some charts and asked questions without considering the needs of the internal customers. The lack of attention to their concerns and need for understanding BBC was evident. Despite this lack of training, personnel believed that BBC captured the economics of the business better than the labor-based system. The BBC system led to improved product-cost accuracy and greater visibility compared to the labor-based system. This consensus was shared across all plants. The benefits of BBC extended beyond strategic marketing and product-mix decisions. It also helped improve relations with GEE customers at the plant level. In the past, there was a lack of data-based knowledge to answer customer inquiries about product costs and pricing. There was a need for access to ATA

that would validate claims about cost.We struggled to justify the cost of a product using our old cost system. The process of price justification was confusing for our customers and frustrating for us. Now, when someone calls, we can explain the breakdown of costs and provide the total cost of the product. This has been beneficial for both our customers and us. To maintain the BBC system, Gee's accounting department implemented a revaluation process in September 2001. Originally, revaluations were planned every six months but were later extended to one year due to cost concerns. The accounting department is responsible for updating the BBC system and overseeing the revaluation process. One operations manager appreciated this approach as it allows manufacturing personnel to focus on making products efficiently rather than being burdened with accounting tasks.

It is important for accountants to focus on accounting tasks and manufacturing personnel to focus on manufacturing tasks. However, there may be instances where manufacturing personnel would benefit from having a basic understanding of accounting principles.

The finance side agrees that there is a delicate balance in terms of how involved operations people should be in creating and maintaining data. While they want access to data that can help them, they don't want to be overwhelmed with accounting issues because their main focus is on product creation.

If operations people are involved too much in accounting tasks, it will alienate them as it is not their job. Gee's long-term objective is to transition from BBC (activity-based costing) to BAM (activity-based management). BAM aims to use activity-based information to optimize product and process costs. The first phase of the implementation, the building

of the BBC model, was completed in March 001, allowing Mike Alberta and his senior management team to utilize the model's output for optimizing the product mix.

The second phase of the BBC initiative, scheduled to start in January 2002 (as shown in Exhibit 1), aimed to train employees in using process analysis tools and relational databases with BBC data. This would enable them to calculate real-time product reengineering cost projections, prioritize process cost reduction opportunities, and realize them. However, the response to these BAM-oriented applications of the BBC data was not enthusiastic. The level of management support for BAM was not as strong as it was for BBC. Mike Alberta appreciated the product line profitability "snapshot" provided by BBC but did not support the use of BAM for business improvement. Furthermore, Chris Richards, the steering committee chairman and BBC champion, abruptly left the company. Without extensive and visible top-management support, BAM was unable to influence the behavior of many GEE employees, mainly because of their heavy workload. A plant accountant from Reading suggested that strategic and operational planning should focus on activities. To achieve this, manufacturing and engineering functions would need to be educated on BAM to increase their involvement.At GEE, there is no resistance to people using BAM. However, the problem lies in the fact that everyone has so much to do that if their job doesn't require them to fully understand BAM, they tend to avoid it. The lack of support from top management has created additional problems, hindering the integration of BAM throughout the organization. Training during the initial stages of BBC implementation was minimal, and there was almost no commitment to

training resources during the BAM stage.The way I perceive BAM is that all costs should be accessible in a manner that allows for flexible analysis. I would like to generate a parental chart showcasing our test-activity rates, either by site or by sector. This way, I could examine this data and question why one tester is twice as expensive as another. Along with this, I require the ability to perform "what-if" scenarios to evaluate the impact of changes in cost flows. Currently, I have to painstakingly calculate these adjustments one by one. A plant accountant from Huntsville also expressed frustration regarding the understanding of cost systems among management teams. They always expect immediate results, as if it could be done overnight. Is the implementation of our system as fast as management desires? Probably not. Are we implementing it as quickly as we can? Yes, everyone is doing their best. However, I believe that the expectations set are too ambitious considering the complexities involved. It's like going to a candy store and wanting everything right away. Patience is necessary. Furthermore, the lack of technological resources intensified the frustrations during the kickoff stage of the BBC implementation.The project team successfully marketed the benefits of a BAM-oriented system to generate interest at the plant level. However, there was a lack of satisfactory discussion about the time required to create an integrated and fully relational BBC system to provide these benefits. The complexity of creating such a system was not fully understood by the steering committee and project team, and they did not anticipate the disappearing resources needed for system upgrades. As a result, the marketing campaign unintentionally oversold

the pace of evolution for the activity-based system. Ann Concerns observed that keeping up with the demands of the system required significant effort, such as bringing in four IBM experts. The complexity and volume exceeded initial expectations. Top-level management was also responsible for establishing organizational structure, managing employee access to corporate data sources, and granting decision-making rights. At GEE, only 60 out of 6,300 employees at its four plants were familiar with the BBC system.The majority of the 6,300 employees worked in fabricating, assembling, and testing products but had no familiarity with the BBC system. An operations manager from Malaysia expressed concerns about how this approach would limit the potential application of BAM at the process level. Despite employees' willingness to improve the bottom line, old conventions led to constant confidentiality claims, hindering the provision of information that front-line workers would appreciate. The BBC system now allows visibility into costs of activities like solder dip, but activity-based cost information is still not accessible to front-line workers. Although there were challenges in adopting BAM principles, some advocates recognized that the BBC system presented cost information in an intuitive manner.A product engineer from Huntsville discussed the benefits of using BAM to support product-design and process-cost-reduction efforts. The strategic marketing team gathers customer feedback to determine desired product features and acceptable pricing. They provide me with a target selling price and I assess the feasibility. In this case, they wanted to sell multiple grades of the product, which requires multiple test insertions. The cost of these test insertions alone exceeded the target price. Hence, we needed to find an alternative solution before moving forward. Thanks to BBC, we

were able to make an informed decision about accepting this type of business opportunity.